Fidelity Cleared to Stake Up to 100% of Its Ethereum and Solana ETF Holdings

Fidelity has secured regulatory approval to stake up to 100% of the assets held in its spot Ethereum (FETH) and Solana (FSOL) exchange-traded funds, a significant step that could reshape how these products generate returns. The amendments to the funds’ prospectuses, first reported by CryptoSlate, allow the asset manager to actively stake the underlying tokens, a move that aligns with a broader trend of integrating proof-of-stake rewards into traditional financial products.

Staking at Scale: What Fidelity’s Move Means

As of June 30, FSOL was already staking 99.64% of its holdings, indicating that the fund had been operating near its new limit even before the formal approval. FETH, on the other hand, is expected to begin staking soon after a rule change on Aug. 21. The approval comes after months of regulatory discussions and reflects a growing acceptance of staking as a legitimate yield-generating mechanism within the ETF structure.

Staking involves locking up tokens to help secure a blockchain network, with validators earning rewards in return. For ETF holders, this means the fund can generate additional income, potentially offsetting some of the costs associated with managing the product. However, it also introduces new risks, particularly around liquidity and redemption timing.

Withdrawal Delays and Liquidity Risks

The amended filings also detailed potential withdrawal-delay risks, a critical consideration for investors. Unstaking SOL takes approximately two days, while ETH unstaking times can vary significantly depending on validator queue lengths. During periods of network congestion, large ETF redemption requests could face delays, as the fund would need to unstake tokens before meeting redemption obligations.

This is a crucial point for institutional investors who may need to exit positions quickly. The prospectus amendments explicitly warn that such delays could impact the fund’s ability to process redemptions in a timely manner, potentially leading to deviations from the ETF’s net asset value (NAV) or requiring the fund to borrow or sell other assets to meet obligations.

Why This Matters for ETF Investors

For investors, the ability to stake up to 100% of holdings introduces a new layer of complexity. While staking rewards can enhance returns, they also tie up capital in a way that is not immediately liquid. The trade-off between yield and liquidity is now a key consideration for anyone holding FETH or FSOL.

Moreover, the approval signals a regulatory shift. The Securities and Exchange Commission (SEC) has historically been cautious about staking in ETFs, but Fidelity’s approval suggests a more nuanced approach is emerging. This could pave the way for other asset managers to follow suit, potentially leading to a wave of staking-enabled ETFs across the industry.

Conclusion

Fidelity’s approval to stake up to 100% of its Ethereum and Solana ETF holdings marks a milestone in the integration of crypto-native yield mechanisms into regulated financial products. While the move offers potential benefits, it also introduces liquidity risks that investors must weigh carefully. As the market adapts, this development could influence how other issuers structure their crypto ETFs and how regulators view staking in the future.

FAQs

Q1: What does it mean for Fidelity to stake up to 100% of its ETF holdings?
It means Fidelity can use all of the Ethereum or Solana held in the ETF to participate in proof-of-stake validation, earning rewards that can be distributed to fund holders. This maximizes potential yield but also reduces the amount of instantly liquid assets in the fund.

Q2: How does staking affect ETF redemptions?
When an investor requests a redemption, the fund must unstake tokens to return them. Unstaking can take time—about two days for Solana and potentially longer for Ethereum during network congestion. This could delay redemption payouts, especially for large requests.

Q3: Is staking in ETFs new?
Staking in ETFs is relatively new. Fidelity’s approval is one of the first for a major U.S. asset manager, though some European and Canadian products have already incorporated staking. The SEC’s approval here may signal a more open stance, potentially leading to broader adoption.